Raising Revenue for Capital Infrastructure

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1 Raising Revenue for Capital Infrastructure Jeff Hughes Environmental Finance Center Shadi Eskaf Environmental Finance Center

2 How satisfied are you with your rates and the revenue they generate? 1. Not at all need an overhaul 2. Not very they need a lot of work 3. Somewhat tweaks needed 4. Very no changes needed 75% 13% 6% 6% Not at all need an... Not very they need... Somewhat tweaks... Very no changes...

3 Session objectives 1. Discuss revenue challenges impacting availability of funds for capital investment 2. Identify strategies for addressing specific revenue challenges 1. Consistent undercharging and/or operating losses 2. Revenue vulnerability

4 Rates background Rates (160A-314/153A-277) Impact charges (160A-314/153A-277) Assessments (160A, Art.10/153A, Art. 9)

5 Rates background: GS 160A-314 /153A-277 A) A city may establish and revise from time to time schedules of rents, rates, fees, charges, and penalties for the use of or the services furnished by any public enterprise.

6 Rate Setting Resource New Publication: Guidelines for NC Water Systems: Designing Rate Structures that Support Your Objectives Available at: /projects/capacitydevel opment/financial.htm# guidelines

7 Before You Begin: Rank Your Utility s Rate Setting Objectives Full cost recovery/ revenue stability Fostering businessfriendly practices Encouraging conservation Maintaining affordability (keeping rates low to whom?) Refer to this list and focus on the highest ranked objectives when following the guidelines for selecting the appropriate rate structure design.

9 22) Please rank up to 3 of the most important objectives that influence your utility's rates and/or rate structure. The #1 factor The #2 factor The #3 factor Recover costs 77% 12% 4% Encouraging economic development 2% 9% 19% Maintaining affordability for residential customers 17% 52% 19% Encouraging conservation/reduction of use 1% 11% 20% Increasing sales due to excess supply/capacity 0% 2% 6% Simplicity and understandability of the bill 0% 2% 7% Comparability to other utilities' rates 2% 11% 24%

10 65) Do you think your water or wastewater system is close to full capacity during the peak month? n = 235 n = % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 6% 8% 77% 79% 16% 13% Water Wastewater Don't know No Yes

11 Rates per SL /HB 2499 water rate structures that are adequate to pay the cost of maintaining, repairing, and operating the system, including payment of principal and interest on indebtedness incurred for maintenance or improvement of the water system also consider the effect of water rates on water conservation and recommend rate structures that support water conservation.

12 The full cost rates spectrum: Where are you? Rates cover budget expenditures Rates provide funds for capital Future liabilities covered (retirement) Moderately external externalities (source water protection) Very external externalities (climate change) Saying no to grants and subsidies

13 What the numbers say

16 Who benefits most from your undercharging? Will it be this household: Or this one?

17 Annual MGD Is it variable or is it gone?? Actual Annual 5-Year Moving Average 1967 SWD Forecast 1973 RIBCO Forecast 1980 Complan Forecast Medium 1980 Complan Forecast Medium-Low 1985 Complan Forecast-Medium 1993 WSP Forecast

18 Population What happened in Seattle Prices went up Homes became more efficient Water users became more efficient Decentralized initiatives increased 1,400, ,300, ,200,000 Population 240 1,100, ,000, , , ,000 Total Water Consumption , , , , , ,

19 28) What percentage of your utility's total annual revenue was billed to your 5 largest customers during the last 12 months (including industries, businesses, etc.)? n = 251 5% 10% 20% 42% Less than 10% 11%-25% 26%-50% More than 50% 24% Cannot determine or don't know

20 Source: Fayetteville Observer 2/6/04

Why does this happen? Utilities costs are mostly fixed, not dependent on the amount of water sold/used by the customers. But the majority of revenues come from the amount of water sold.

21 Why does this happen? Utilities costs are mostly fixed, not dependent on the amount of water sold/used by the customers. But the majority of revenues come from the amount of water sold. If customers conserve, revenues drop significantly but not costs. Revenue and Expenses for Charlotte-Mecklenburg Utilities in a Given Year Source: CMU Director Doug Bean s presentation to the Charlotte City Council on December 1, 2008.

22 Revenue vulnerability and variability Usage will vary from year to year Increased prices reduce usage Irrigation use is highly variable Revenue variability is a function of usage and price Utility Average household water use Percent change FY07 FY08 CMU 6,436 6,109-5% PWC 4,980 5,410 +9% OWASA 4,916 4,501-8% GUC 4,641 4,788 +3% HP 4,467 4,199-6%

23 Basic strategies Change what you sell Conservative finance models Multi-year finance plan Annual rate adjustments Customer analysis Affordability strategies Well designed increasing block structure and water budget based rates Rethinking minimum charges

24 Annual rate adjustments How does this compare to previous years rate of raising rates?

25 Basic customer analysis

27 17) Does your utility have any of the following programs or services to assist customers with financial hardships? n = 263 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Lower rates for residential customers who meet specific criteria Hardship fund managed by the utility to help pay customer bills Hardship fund managed by another organization to help pay bills Debt forgiveness (canceling a customer's bill) Extensions to due dates Level payment plan (pay same bill amount for 11 months) Other Don't know None of the above

28 Monthly-Equivalent Water Billing Rate structures matter $60 $50 $40 $30 $20 Median of 358 Water Systems, FY04-05 C Utility A $10 $0 B A Utility B Utility C Monthly Consumption (in 1,000 gallons)

29 34) During the last few years, what best describes how often your utility reviewed its customer rates? n = 258 3% 2% 2% 7% More than once a year 12% Annually Every few years Over 5 years 75% Other Don't know

30 Preliminary results 40) When was the last time your utility studied and reviewed your rate structure design to consider adjusting it? n = % 7% 33% 19% 23% More than 10 years ago More than 3 years ago More than 1 year ago In the last year Don't know

33 7) Which of the following services does your utility also bill for on the water/wastewater bill? Stormwater Garbage collection Recycling program Landfill disposal fee Electricity Natural gas Other non-water, non-wastewater charges Don't know None of the above n = 267 0% 20% 40% 60% 80% 100%

34 Legislative background Session Law (a) Local government water systems and large community water systems shall require separate meters for new in-ground irrigation systems that are connected to their systems. Effective July 1, 2009

35 Product Focus --- Irrigation Water Utility Separate irrigation rates Relation to residential water rates Burlington N Decreasing block - Same as residential water rates Cape Fear Public Utility Y Uniform at Tier 3 rates Cary Y Increasing block at Tier 3 and Tier 4 residential water rates (break at 15 kgal) Cary (Reclaimed) Y Uniform at Tier 1 residential water rates CMU Y Increasing block at Tier 3 and Tier 4 residential water rates (break at 16 ccf) Durham Y Uniform at Tier 4 residential water rates Fayetteville PWC Y Increasing block starting higher than Tier 4 residential water rates Greensboro Y Uniform at Tier 4 of residential water rates GUC N Uniform - Same as residential water rates High Point Y Uniform Higher than residential water rates OWASA Y Uniform Higher than Tier 3 of residential water rates Raleigh N Uniform Same as residential water rates Winston-Salem Y Increasing Block Same as residential water rates until Tier 5, then Higher

36 Metered and estimated irrigation usage Utility Number of residential accounts (FY08) Percentage with irrigation meters Fayetteville 75,062 8% 12% Greenville 29,397 3% 4% High Point 36,864 3% 4% CMU 225,247 2% 12% OWASA 18, % 5% Percent that irrigate with in-ground systems (estimated)

38 Defining the average irrigator

Defining the average irrigator Monthly usage in gallons/month No irrigation meter Indoor and outdoor use combined Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May 16000 16000 16000 12000

39 Defining the average irrigator Monthly usage in gallons/month No irrigation meter Indoor and outdoor use combined Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May With irrigation meter Indoor Outdoor

40 Comparing costs for the residential irrigator With irrigation meter Without irrigation meter Irrigation tap and impact fees Backflow prevention assembly installation and maintenance Irrigation base and rates Water and sewer rates for irrigation

41 New business models? Airlines sur charge model Phone/cable bundled services for predetermined fixed fees REI estimate prices based on revenue forecasts and return excess funds to customers/owners as available

42 Using drought surcharges to weather the storm What is a drought surcharge? A temporary increase of water rates during drought conditions Example - OWASA s drought surcharge Individually-metered residential accounts Block Use level: 0-2,999 3,000-5,999 6,000-10,999 11,000-15,999 >16,000 Stage 1 No surcharge No surcharge No surcharge 1.5x normal block 4 rate 2x normal block 5 rate Stage 2 No surcharge No surcharge 1.5x normal block 3 rate 2x normal block 4 rate 3x normal block 5 rate Stage 3 No surcharge 1.25x normal block 2 rate 2x normal block 3 rate 3x normal block 4 rate 4x normal block 5 rate

43 NC Rate Setting Resources Guide to Billing, Kara Millonzi Rates Book EFC Web Resources (data, guidelines, dashboard) LGC Data Painful Art of Rate Setting Rates Course 2/23/2010 Rate Setting Guide AWWA M1 Guide Rural Water Association Consultants NCLM/EFC Practices Survey (Coming soon!!)

44 9) Besides the total bill amount, what other information does your utility provide on the customer bill or in bill inserts? n = 267 Description of your utility's rates or rate structure Customer's consumption amount for this billing period Customer's historic consumption amounts for the past few months Comparison of customer's consumption to system-wide average Comparison of customer's consumption to neighborhood average Number of billed days Breakdown of the bill amount by the different services Breakdown of the fees by special purpose (debt service fee, etc.) Billing policies (disconnection policy, after-hours contact, etc.) Utility communication messages (newsletters, notifications, etc.) Other Don't know None of the above 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

45 19) If someone from outside the municipal limits asks why they are charged different rates, what is/are the reason(s) that your utility provides them? n = 173 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% It is the prevailing practice in most towns in NC It is more expensive to deliver services to customers outside municipal limits Because they are receiving a municipal service and not paying municipal taxes To encourage development within the town #1 reason for 4% #1 reason for 21% #1 reason for 64% To compensate the town residents for carrying the risk of owning the system #1 reason for 9% Other Don't know

46 29) Does your utility pay for watershed protection or land acquisition from the revenues it collects from customers? n = % 12% Yes No Don't know 76%

47 38) At the end of your last rates review, what did your utility present or share with your Governing Board (City Council / County Commissioners / Board of Directors) in charge of reviewing and adopting rate adjustments? How much the "average residential bill" would change How changing circumstances are affecting your finances Anticipated capital expenses The financial condition of your utility The physical condition of your utility Specific other utilities' current or proposed rates The EFC Rates Dashboard Other Don't know None of the above n = 254 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

48 39) What was the outcome of your utility's last rates review? n = % 4% 1% 16% 6% 12% 1% Found did not need to adjust rates Lowered rates Found needed to raise rates, but Governing Board did not approve any rate increase Found needed to raise rates, but Governing Board only approved a partial rate increase Governing Board approved the proposed rate increase fully Other (please specify) Preliminary Don't know

49 Revenue Strategies for a Business Model in Trouble Jeff Hughes Environmental Finance Center jhughes@sog.unc.edu Mary Tiger Environmental Finance Center mwtiger@sog.unc.edu

50 58) What is included in your utility's inventory of key assets? n = 206 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% The year the asset was installed Current condition of the asset (e.g. good, needs minor repairs, critical need for refurbishment, etc.) Expected lifecycle of the asset or when it is anticipated to expire A current or future replacement cost for the asset How important/critical the asset is to your system's operations Financing plan for replacing or rehabilitating the asset Other (please specify) None of the above Don't know

51 63) Which of the following most closely describes your utility? 2% 4% 6% 2% 7% n = 251 Municipality, serving the town's residents and some customers in nearby, unincorporated areas Municipality that provides retail service to other municipalities, but exists mainly to serve the municipality's residents Municipality that is more like a regional utility but is owned by the town County system that serves residents in specific unincorporated areas of the county 6% 10% 53% County system that serves residents in all unincorporated areas of the county County system that also serves residents in some of the incorporated areas of the county Other unit of government aimed at serving a specific region 10% Non-governmental utility Other

Roadmap to Financial Health

Roadmap to Financial Health Jeff Hughes Shadi Eskaf March 5-6, 2012 Chapel Hill, NC www.efc.unc.edu Session Objectives 1. Improve ability to assess financial health 2. Improve understanding of strategies